UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

Commission file number 000-26887

Silicon Image, Inc.

(Exact name of registrant as specified in its charter)

1060 East Arques Avenue

Sunnyvale, CA 94085

(Address of principal executive offices and zip code)

(408) 616-4000

(Registrant’s telephone number, including area code)

Securities registered pursuant to section 12(g) of the Act:

Common Stock, $0.001 par value

      Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 under the Securities Exchange Act of 1934).     Yes þ          No o

      The aggregate market value of voting and non-voting common equity held by non-affiliates at June 30, 2004 was approximately $793,090,145, based on the last reported sale price of common stock on the NASDAQ Stock Market on that date of $13.11 per share. For purposes of this disclosure, shares of common stock held by persons who hold more than 5% of the outstanding shares of common stock (based on Schedule 13G reports filed by such persons in February 2004) and shares held by officers and directors of the Registrant as of June 30, 2004 have been excluded because such persons may be deemed to be affiliates. The number of shares of the Registrant’s common stock outstanding as of December 31, 2004 was 78,132,000. Portions of the Proxy Statement for the 2005 Annual Meeting of stockholders to be held on May 24, 2005, are incorporated by reference in Part III of this Form 10-K.

TABLE OF CONTENTS

      This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These forward-looking statements involve a number of risks and uncertainties, including those identified in the section of this Annual Report on Form 10-K entitled “Factors Affecting Future Results,” that may cause actual results to differ materially from those discussed in, or implied by, such forward-looking statements. Forward-looking statements within this Annual Report on Form 10-K are identified by words such as “believes,” “anticipates,” “expects,” “intends,” “may,” “will”, “can”, “should”, “could”, “estimate”, based on”, “intended”, “would”, “projected”, “forecasted” and other similar expressions. However, these words are not the only means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly release the results of any updates or revisions to these forward-looking statements that may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-K with the SEC. Our actual results could differ materially from those anticipated in, or implied by, forward-looking statements as a result of various factors, including the risks outlined elsewhere in this report. Readers are urged to carefully review and consider the various disclosures made by Silicon Image, Inc. in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business.

PART I

      Silicon Image is a leader in multi-gigabit semiconductor solutions for the secure transmission, storage and display of rich digital media. The Company’s mission is to be the leader in defining the architectures, intellectual property (IP) and semiconductor technology required to build secure digital content delivery systems. To ensure that rich digital content is available across devices, whether consumer electronics (CE), personal computers and displays (PC) or storage devices, they must be architected for content compatibility and interoperability.

      Silicon Image’s strategy entails establishing industry-standard, high-speed digital interfaces and building market momentum and leadership through its first-to-market, standards-based IC products. Further leveraging its IP portfolio, the company broadens market adoption of the Digital Visual Interface (DVI), High-Definition Multimedia Interface^tm (HDMI^tm) and Serial ATA (SATA) interfaces by licensing its proven IP cores to companies providing advanced system-on-a-chip solutions incorporating these interfaces. Licensing, in addition to creating revenue and return on engineering investment in market segments we choose not to address, creates products complementary and in some cases competitive to our own that expand the markets for our products and help to improve industry wide interoperability.

      Silicon Image is a leader in the global PC and digital display arena with its innovative PanelLink branded digital interconnect technology, which enables an all-digital connection between PC host systems, such as PC motherboards, graphics add-in boards and notebook PCs and digital displays such as LCD monitors, plasma displays and projectors. Silicon Image’s PanelLink technology serves as the basis for both the DVI standard as well as for the popular HDMI standard, designed for CE applications. Silicon Image’s PanelLink DVI and HDMI solutions are the most popular DVI and HDMI implementation in the market, with more than 80 million units shipped to date.

      In 2000, in order to decrease our dependence on the PC business, we embarked upon a plan to diversify into the CE and storage markets. Products sold into the PC market have been declining as a percentage of our total revenues and generated 23.8% of our revenue in 2004, 32.0% of our revenue in 2003, and 58.1% of our revenues in 2002. If we include licensing revenues, these percentages would be 24.0%, 34.9%, and 62.6% for the years ended December 31, 2004, 2003, and 2002, respectively.

      Leveraging our core technology and standards-setting expertise, Silicon Image is a leading force in advancing the adoption of HDMI, the digital audio and video interface standard for the consumer electronics market. Introduced in 2002 by founders Hitachi Ltd. (Hitachi), Matsushita Electric Industrial Co. (MEI or

Panasonic), Philips Consumer Electronics International B.V. (Philips), Silicon Image, Sony Corporation (Sony), Thomson Multimedia, S.A. (Thomson or Thomson RCA) and Toshiba Corporation (Toshiba), HDMI enables the distribution of uncompressed, high-definition video and multi-channel audio in a single, all-digital interface that dramatically improves quality and simplifies cabling. Based on the same core technology used by the DVI standard, Silicon Image’s HDMI technology is also marketed under the PanelLink brand and includes High-bandwidth Digital Content Protection (HDCP), which is supported by Hollywood studios as the technology of choice for the secure distribution of premium content over uncompressed digital connections. Silicon Image shipped the first HDMI-compliant silicon to the market and currently remains the market leader for HDMI functionality.

      Products sold into the CE market have been increasing as a percentage of our total revenues and generated 41.2%, 24.9% and 11.0% of our total revenues for the years ended December 31, 2004, 2003 and 2002, respectively. If we include licensing revenues, these numbers would be 48.8%, 32.2%, and 11.1% for the years ended December 31, 2004, 2003, and 2002, respectively. Our CE products offer a secure interface for transmission of digital video and audio to consumer devices, such as digital TVs, HDTVs, A/ V receivers, set-top boxes (STBs) and DVD players. Demand for our products will be driven primarily by the adoption rate of the HDMI standard within these product categories.

      In the storage market, Silicon Image has assumed a leadership role in SATA, the new high-bandwidth, point-to-point interface that is replacing parallel ATA in desktop storage and making inroads in the enterprise arena due to its improved price/performance. Silicon Image is a leading supplier of discrete SATA devices with multiple motherboard and add-in-card design wins. Silicon Image’s SATALink^tm branded solutions are fully SATA-compliant and offer advanced features and capabilities such as Native Command Queuing, port multiplier capability and ATAPI support. Silicon Image also supplies high-performance, low-power Fibre Channel Serializer/ Deserializer (SerDes) to leading switch manufacturers.

      In September 2004, Silicon Image introduced its first products based on its SteelVine^tm storage architecture that is expected to serve the storage needs of the Small to Medium Business (SMB) and consumer electronics markets with a system-on-a-chip implementation that includes a high-speed five-port switch, two micro-processors, firmware and the SATA interface, among other features. There have not been any volume shipments on these products. Products sold into the storage market, as a percentage of our total revenues, generated 23.0%, 29.4%, and 22.7% of our revenue for the years ended December 31, 2004, 2003, and 2002, respectively. If we include licensing revenues, these numbers were 27.1%, 32.9%, and 26.3%, for the years ended December 31, 2004, 2003, and 2002, respectively. Demand for our storage semiconductor products is dependent upon the rate at which interface technology transitions from parallel to serial, market acceptance of our SteelVine architecture, and the extent to which SATA and Fibre Channel functionality are integrated into chipsets and controllers offered by other companies, which would make our discrete devices unnecessary.

      Prior to 2000, we focused most of our efforts on the sale and development of PanelLink DVI transmitters, receivers and controllers for the PC and display market. In 2000, we began focusing our resources on entering two new markets, CE and storage, which we believed would grow significantly and in which we could apply our technology and expertise in high-speed serial interfaces. During 2000, we acquired DVDO, a provider of digital video processing systems for the CE market and Zillion, a developer of high-speed transmission technology for data storage applications.

      In 2001, we focused on accelerating our entry into the CE and storage markets, leveraging our IP into licensing revenue, and restructuring the company to improve profitability. During 2001, we acquired CMD, a provider of storage subsystems and semiconductors designed for storage area networks, and SCL, a provider of mixed-signal and high-speed circuit designs.

      During 2002, we achieved double-digit sequential revenue growth in each fiscal quarter, resulting in annual revenue of $81.5 million, which was a 57% increase from 2001 revenue levels. We also began to see the benefits of our diversification strategy, which resulted in establishing a presence in the CE and storage markets. Additionally, we were able to successfully leverage our intellectual property to generate $6.7 million

of development, licensing and royalty revenue. We also focused on improving our profitability and reducing our cash usage.

      During 2003, we achieved solid revenue growth, resulting in annual revenue of $103.5 million, representing a 27% increase compared to 2002. This growth was the result of our diversification strategy and the continued expansion of our presence in the CE and storage markets. Additionally, we were able to successfully leverage our intellectual property to generate $14.2 million of development, licensing and royalty revenue.

      During 2004, we achieved strong growth, resulting in annual revenue of $173.2 million, representing a 67.3% increase compared to 2003. We continued to take advantage of our diversification strategy and successfully expanded our presence in the growing CE and storage markets. Additionally, we were able to successfully leverage our intellectual property to generate $20.8 million of development, licensing and royalty revenue.

      In the storage market, we had a number of new and advanced product offerings during 2004. We were able to achieve numerous design wins with our SATALink products. In particular, there was widespread market acceptance of the PCI to four-port SATA solutions for the PC and server markets and a number of major manufacturers incorporated our products into their motherboards. We believe we are well positioned to benefit from the continuing transition to SATA technology. Furthermore we expect to leverage our storage expertise in the new and rapidly growing area for CE storage devices through our SteelVine^tm achitecture. We anticipate that many next-generation consumer devices such as set-top boxes, Personal Video Recorders (PVRs) and media PCs are likely to have one or more external SATA ports. Demand declined throughout 2004 for our parallel ATA products as the market continued to transition from these technologies to serial ATA. We expect demand for these legacy products to continue to decrease significantly throughout 2005 and beyond.

      In the PC market, during 2004, our business was favorably impacted by the better than expected ramp in Intel’s Grantsdale platform, a new Intel integrated graphics chipset (IGC) in desktop computers supporting Intel’s new PCI Express bus interface technology. As PC manufacturers transitioned to PCI Express technology, they also transitioned to new DVI transmitters compatible with PCI Express IGCs. In addition, our business in the PC market was favorably impacted by strong demand for our integrated panel controllers that are incorporated into LCD panels used in all-digital LCD monitors.

      When Intel moved from PCI to PCI Express on the Grantsdale platform, it changed the interface for DVI transmitters and moved from the Digital Video Output (DVO) interface to the new Serial Digital Video Output (SDVO) interface. Our DVI transmitter was designed to work with Intel’s SDVO port in the Intel Grantsdale platform, and sales of this transmitter will continue to be driven by the success of the Grantsdale platform where DVI is offered.

      DVI-based solutions also found their way into CE applications during 2003 and 2004. Revenue for these solutions is included in our CE revenues. We expect the majority of these DVI CE applications to migrate to HDMI during 2005. The PC market saw DVI adoption expand significantly in 2004 to reach an estimated 46% on PC hosts with 82% on graphics cards. We expect DVI adoption rates to continue to expand over the next two years as the market moves away from analog and dual-mode (combination of analog and digital) solutions to all-digital, higher quality and lower-cost solutions. Correspondingly, we expect the prices of digital displays to continue to decrease and drive increased demand for digital only displays that incorporate DVI transmitters and panel controllers such as those sold by us. We expect to introduce our next generation of panel controllers during 2005.

      Generally, our transmitter products continued to experience competitive pressure, primarily from integration by the graphics chip suppliers such as ATI Technologies and nVidia. Thine Electronics and Texas Instruments also remain competitors. Because of this increased competition there were lower average selling prices for these products during 2004. We expect graphics card manufacturers to continue to integrate a transmitter into their graphics chip, thus eliminating the need for a discrete transmitter device in many host products. Solutions that utilize the integrated graphics supplied by the Intel chipset and that wish to connect

to the LCD monitor via DVI will be the primary focus of our transmitter business. In addition, we generated licensing revenue by licensing certain technology to companies for use in making products for the dual-mode interface market.

      In 2004, we launched PanelLink Cinema Partners^tm, LLC; a wholly-owned subsidiary of Silicon Image, Inc. PanelLink Cinema Partners is chartered with the growth and proliferation of the PanelLink Cinema Partners initiative, and is currently supported by Hitachi, LG, Mitsubishi, Sanyo, Samsung, Sony, Sunplus, and others. The PanelLink Cinema Partners program is aimed at providing consumers with a simple means to identify HDTV’s and other consumer electronic devices as being content ready devices — that is, the PLC content ready logo identifies them as having been tested for HDCP functionality, and interoperability with other PanelLink branded consumer devices. We believe that the consumer electronics industry is in the early stages of a transition to high-definition all-digital content. Our goal is to provide leadership in defining a secure content delivery infrastructure that will help power this transition.

      In 2005, we entered a three-year joint development, marketing and manufacturing relationship with Sunplus, a long time customer. In this relationship, Sunplus will license certain digital video processor technology to us, and we will collaborate on product development. In addition, we agreed to invest $380,000 for a minority interest in a new Taiwan-based joint venture with Sunplus which would provide product engineering and other services, and arrange for manufacturing of certain digital video processor products. We have agreed to place orders for specified volumes of products with this joint venture through 2007, so long as the joint venture meets our requirements for quality, timeliness, and competitive pricing.

Markets and Customers

      We focus our sales and marketing efforts on achieving design wins with leading original equipment manufacturers (OEMs) of PC, CE and storage products. In most cases, these OEMs outsource manufacturing functions to third parties. Therefore, once our product is designed into an OEM’s product, we typically work with the OEM’s third-party manufacturer to facilitate the design for production. After the design is complete, we sell our products to these third-party manufacturers either directly or indirectly through distributors.

      Historically, a relatively small number of customers and distributors have generated a significant portion of our revenue. Our top five customers, including distributors, generated 47%, 41%, and 41%, of our revenue in 2004, 2003 and 2002, respectively. The increase in 2004 from 2003 and 2002 levels can be attributed to the increased level of purchasing activities with these distributors. Additionally, the percentage of revenue generated through distributors tends to be significant, since many OEMs rely upon third-party manufacturers or distributors to provide purchasing and inventory management functions. Our revenue, generated through distributors, was 45% in 2004, compared to 42% in both 2003 and 2002. Our licensing revenue is not generated through distributors, and to the extent licensing revenue increases, we would expect a decrease in the percentage of our revenue generated through distributors. A substantial portion of our business is conducted outside the United States; as a result we are subject to foreign business, political and economic risks. Nearly all our products are manufactured in Taiwan or elsewhere in Asia and for the years ended December 31, 2004, 2003, and 2002, 72%, 74%, and 72% of our revenue, respectively, was generated from customers and distributors located outside the United States, primarily in Asia.

Products

      Silicon Image, Inc. is a leader in multi-gigabit semiconductor solutions for the secure transmission, storage and display of rich digital media. To ensure that rich digital content is available across devices, consumer electronics, PC and storage devices must be architected for content compatibility and interoperability. Our industry and the markets we serve are characterized by rapid technological advancement. We constantly strive for innovation in our product offerings. We introduce products to address markets or applications that we have not previously addressed, and to replace our existing products with products that are based on more advanced technology and that incorporate new or enhanced features. Silicon Image markets

products to the CE, PC and displays, and storage markets. We expect to continue integrating more functionality into our existing products in order to enhance their performance and capabilities.

      When we introduce replacement products, we notify our customers in advance, work with our customers to qualify and migrate to our newer products and accept final orders for replaced products, thereby enabling us to eventually discontinue production and support for older, less advanced products. We may decide to phase out products for reasons other than new product introductions. Such reasons could include failure of products to achieve market acceptance, changing market conditions and changes in business strategy.

Consumer Electronics

      Developed by Sony, Hitachi, Thomson (RCA), Philips, Matsushita (Panasonic), Toshiba and Silicon Image as the digital interface standard for the consumer electronics market, the HDMI specification combines uncompressed high-definition video and multi-channel audio in a single digital interface to provide digital quality over a single cable.

      Silicon Image’s Transition Minimized Differential Signaling TMDS® technology serves as the basis for HDMI, as well as for the Digital Visual Interface (DVI) standard designed for PC applications.

      Fully backward-compatible with products incorporating DVI (also pioneered by Silicon Image), HDMI offers additional consumer enhancements such as automatic format adjustment to match content to its preferred viewing format, and the ability to build in intelligence so one remote click can configure an entire HDMI-enabled system. HDMI has the support of major Hollywood studios and offers significant advantages over analog A/ V interfaces, including the ability to transmit uncompressed, high-definition digital video and multi-channel digital audio over a single cable.

      Silicon Image’s HDMI products are branded under the PanelLink product family and have been selected by many of the world’s leading CE companies.

      PanelLink HDMI Transmitters. Our PanelLink HDMI transmitter products reside on host systems, such as DVD players, DVD recorders, A/ V receivers, STBs, PVRs and D-VHS players. PanelLink Cinema transmitters encrypt digital video and audio from a source device, combine it in a single, HDMI-compliant stream and transmit the secure content to a HDMI receiver in a display. Our PanelLink HDMI transmitter products include:

      PanelLink HDMI Receivers. Our PanelLink HDMI receiver products reside in display systems, such as DTVs, HDTVs, plasma TVs, LCD TVs, rear-projection TVs and front projectors, as well as A/ V receivers. PanelLink HDMI receivers decode and decrypt an incoming HDMI stream and deliver YPbPr or analog RGB video along with digital audio. Our PanelLink HDMI receiver products include:

      Digital Video Processors. Our digital video processor products are high-quality, digital video format converters that convert any standard-definition interlaced video signal to a non-interlaced signal, resulting in higher-definition images. These products are suitable for DTVs, HD-ready TVs or monitors, LCD TV, LCD, or digital light processing projection DTVs, projectors, or progressive scan DVD players. Our digital video processor products include:

PCs and Displays

      Pioneered by Silicon Image and introduced by the Digital Display Working Group (DDWG), DVI is the de facto standard for connecting PCs to digital displays. DVI defines a robust, high-speed serial communication link between host systems and displays — enabling sharper, crystal-clear images and lower cost designs. Accommodating bandwidth in excess of 165 MHz, DVI provides UXGA support with a single-link interface.

      Silicon Image’s DVI products are branded under the PanelLink product family with well over 60 million DVI-based units shipped into PC and digital display applications.

      PanelLink DVI Transmitters. Our PanelLink DVI transmitter products reside on host systems, such as PC motherboards, graphics add-in boards and notebook PCs. Transmitters take a stream of digital data from a graphics source, convert it to DVI-compliant digital output and transmit that output to a receiver in a display. Our PanelLink DVI transmitter products include:

      PanelLink DVI Receivers. Our PanelLink receiver products reside in display systems, such as flat panel displays and projectors. Receivers receive DVI-compliant digital input and restore the video data format. Our

receivers also contain functionality that simplifies the design of digital displays. Our PanelLink DVI receiver products include:

      PanelLink DVI Controllers. Our PanelLink controller products are suitable for display systems such as flat panel displays and digital televisions. Our PanelLink controller products include:

      Intelligent Panel Controllers. Our Intelligent Panel Controller products are programmable controllers with integrated timing controllers that reside on the LCD display module. These products receive digital input,

restore the video data format and directly interface with the LCD module electronics. Our Intelligent Panel Controller products include:

Storage

      Silicon Image sells a variety of storage products that facilitate today’s demanding storage applications. One of these, is our SteelVine product line, which is designed to integrate RAID-type functionality into a single chip and significantly lower the cost of highly reliable storage solutions for the SMB and CE markets.

      Silicon Image continues to introduce higher-levels of SATA integration, driving higher SATA performance and functionality, and delivering a family of SATA system-on-a-chip solutions and systems for the home, SMB, and enterprise markets.

      Serial ATA offers a number of benefits over parallel ATA interfaces, including higher bandwidth, scalability, lower voltage and narrower cabling. As a result, SATA is expected to become the standard drive interface for desktop and notebook PCs and is expected to establish a significant presence in both enterprise storage and CE applications through external SATA (e-SATA) connections.

      Silicon Image’s new SteelVine storage architecture enables a new class of storage systems solutions available to the SMB and consumer electronics markets. SteelVine-based systems deliver enterprise-class features such as virtualization, RAID, hot-plug and hot spare, in appliance-like solutions that are simple, reliable, affordable and scalable. The first system implementation of the SteelVine architecture, the SV2000^tm, leverages a standard SATA interface to provide a sophisticated RAID solution that does not require special OS drivers or RAID software to load or configure.

      SteelVine Storage Systems. The products in our in SteelVine storage systems family include a 5-drive SATA array and a two and four-external port host bus adapter that maximize the performance of the SV2000. Our storage systems products include:

      Silicon Image’s proven multi-layer approach to providing robust, cost-effective, multi-gigabit semiconductor solutions on a single chip for high-bandwidth applications, lends itself well to SATA storage market applications.

      Silicon Image has assumed a leadership role in driving SATA adoption across desktop and enterprise platforms. Silicon Image’s semiconductor products are branded under the SATALink product family and lead

the market with more than seven million SATA-based units shipped into host bus adapter and device-side storage applications.

      The products in our SATALink family include six host controllers, and two bridge ICs that enable customers to begin to incorporate SATA while they transition from parallel ATA. Our SATA controller, and device bridge products are based on the SATA specifications published by the Serial ATA International Organization (SATA-IO) and include:

      Parallel ATA Controller. Our parallel ATA controller serves products incorporating the parallel ATA interface such as motherboards, add-in cards and embedded systems. Our parallel ATA controller product is:

      Fibre Channel SerDes. Our Fibre ChannelSerializer/ Deserializer (SerDes) products are low-power, high-quality (low-jitter), cost-effective solutions for applications such as host bus adapters (HBAs) and switches that connect PCs and servers to large storage banks. Our Fibre Channel products include:

Promotion of Industry Standards

      A key element of our business strategy is the development and promotion of industry standards in our target markets. Current standards efforts include:

      We, together with Sony, Matsushita (Panasonic), Philips, Thomson (RCA), Hitachi and Toshiba, entered into a Founder’s Agreement and formed a working group to develop a specification for a next-generation digital interface for consumer electronics. In December 2002, the final specification for High-Definition Multimedia Interface (HDMI^tm) 1.0 was released. In May 2004, the HDMI specification was modified (HDMI 1.1) to include DVD audio-related capabilities. The HDMI 1.1 specification is based on our TMDS® technology, the underlying technology for DVI 1.0, and has received strong support from Fox and Universal Studios (now NB Universal), DirecTV and Echostar. Because of the number of devices and the dynamic nature of the consumer electronics market it is expected that the HDMI standard will evolve over time. As an HDMI Founder, Silicon Image has actively participated in the evolution of the HDMI specification. Additionally, the HDMI standard has been approved as a digital connection by the Federal Communications Commission (FCC) and DVD Forum for use in TVs and STB and for use in DVD players. This is discussed in more detail below.

      As of December 31, 2004, one hundred and sixty two companies had signed HDMI Adopters Agreements, under which adopters are granted a standard license to the HDMI specification and necessary patents. We expect HDMI to become a standard digital interface for consumer electronics products that carry digital audio and video signals.

      As a requirement under the HDMI specification, manufacturers are required to test their first product in each of four product categories at an independent HDMI Authorized Testing Center (ATC). We operate an HDMI ATC that tests manufacturer products for conformance to the HDMI specification. Our HDMI ATC opened in August of 2003. We charge a per product fee for testing in the following categories: (i) source devices, such as DVD players, (ii) sink devices, such as televisions, (iii) repeater devices, such as AV receivers, and (iv) HDMI cables.

      In October 2003, the FCC published its proposed rules for the compatibility between cable systems and consumer electronics devices. In November 2003 and March 2004, these rules known as the Plug & Play Final Rules (Plug & Play Rules), became effective. The Plug & Play Rules in setting forth the most recent rules governing the U.S. transition to digital television state that by July 1, 2005, all high-definition STBs distributed by cable operators must include either an HDMI/ HDCP or DVI/ HDCP interface. Further, the Plug & Play Rules state that in order for a consumer electronics product, such as a television, to be marketed or labeled “digital cable ready” it must include either an HDMI/ HDCP or DVI/ HDCP interface. In the past, the FCC has made modifications to its rules and timetable for the digital television transition and it may do so in the future.

      In 2000, the High-bandwidth Digital Content Protection (HDCP) specification HDCP 1.0 was published by Intel, with contributions by Silicon Image, acknowledged in the specification. The specification was developed to provide a content-protected link from host devices, such as PC’s, set-top boxes and DVD and D-VHS players, to displays such as computer monitors, HDTVs and digital TVs. This technology has support from certain members of the Motion Picture Industry Association and aims to prevent high-definition movie content from being copied when transmitted over a digital link. In 2003, the HDCP specification was modified and made available for use over HDMI interfaces.

      In November 2003, the FCC published its proposed rules for the protection of digital broadcast content. In January 2004, these rules known as the Broadcast Flag Final Rules (Broadcast Flag Rules) became effective. The Broadcast Flag Rules state that high-definition television broadcast can only be transferred digitally between consumer electronics devices if an authorized digital output technology is utilized. HDCP is listed as one of the authorized digital output protection technologies and DVI and HDMI are listed as two of the approved transport mechanisms. In the past, the FCC has made modifications to its rules and timetable for the digital television transition and it may do so in the future.

      In addition, the DVD Copy Control Association, responsible for licensing CSS (Content Scramble System) to manufacturers of DVD hardware, discs and related products, has approved HDMI for use in DVD players as an authorized digital output of CSS protected content.

      In 1998, we, together with Intel, Compaq, IBM, Hewlett-Packard, NEC and Fujitsu, announced the formation of the Digital Display Working Group (DDWG). Subsequently, these parties entered into a Promoter’s Agreement in which they agreed to:

      In 1999, the DDWG published the DVI 1.0 specification, which defines a high-speed serial data communication link between computers and digital displays. Today, over 100 companies, including systems manufacturers, graphics semiconductor companies and monitor manufacturers have participated in DDWG activities, and many are developing hardware and software products designed to be compliant with the DVI specification. The DVI 1.0 standard remains in effect and has not changed from its release in 1999.

      As noted above, the FCC in the Plug & Play Rules has determined that by July 1, 2005 all high-definition STBs distributed by cable operators must include either an HDMI/ HDCP or DVI/ HDCP interface. Furthermore, the Plug & Play Rules state that in order for a consumer electronics product to be marketed or labeled “digital cable ready” it must include either an HDMI/ HDCP or DVI/ HDCP interface. In the past, the FCC has made modifications to its rules and timetable for the digital television transition and it may do so in the future.

      During 2000, we acquired Zillion Technologies, a developer of high-speed transmission technology for data storage applications. Zillion contributed in drafting the preliminary SATA 1.0, published in 2001 and was being promoted as a successor to parallel bus technology. We were a contributor to the SATA working group, which includes, Dell, Intel, Maxtor, Seagate, and Vitesse among its promoters. In February 2002, we joined the SATA II Working Group, the successor to SATA working group, as a contributor. The SATA II working group released “Extensions to Serial ATA 1.0 Specifications” in October 2002 and “Extensions to Serial ATA 1.0a rev. 1.1” in November of 2003, to enhance the existing SATA 1.0 specification for the server and network storage markets. The SATA II working group has also released specifications for SATA port multipliers and SATA port selectors.

      In 2004, the SATA II working group released specifications for the next-generation SATA speed of 3 Gb/s and external cabling for SATA.

      In July 2004, a new organization, the Serial ATA International Organization, (SATA-IO), was formed as the successor to the SATA II working group. This organization provides the industry with guidance and support for implementing the SATA specification. We are a member of the SATA-IO, which has a current membership of 90 companies including its current board members, Dell, Intel, Maxtor, Seagate and Vitesse.

      In 2003, Silicon Image joined the Incits T-13 technical committee (T-13 Committee) as a contributor. The T-13 Committee is responsible for publishing the ATA specification and is currently working to make improvements to the ATA specification, including the incorporation of the Serial ATA 1.0a specification into their next revision of the ATA specification, ATA-7. Members of the T-13 Committee include Hitachi, Intel, Seagate, Phoenix Technologies, Maxtor, Microsoft, Fujitsu and nVidia among others.

      In December 2004, Silicon Image joined the CE-ATA Working Group. This organization is a new initiative to define a storage interface tailored to the needs of the handheld and consumer electronics (CE) market segments. The Promoter companies for the CE-ATA Working Group are Hitachi, Intel, Marvell, Nokia, Seagate, and Toshiba. The objective of the initiative is to define a standard interface for small form factor disk drives that addresses the requirements of the handheld and CE market segments, including low pin count, low voltage, power efficiency, cost effectiveness, and integration efficiency. Silicon Image is a contributor to the CE-ATA Working Group.

      We intend to continue to be involved and actively participate in other standard setting initiatives.

Silicon Image Technology

      We invented technology upon which the HDMI and DVI specifications are based and have substantial experience in the design, manufacture and deployment of semiconductor products incorporating this high-speed data communications technology. The advanced nature of our high-speed digital design allows us to integrate significant functionality with multiple high-speed communication channels using industry-standard, low-cost complementary metal oxide semiconductor (CMOS) manufacturing processes. At the core of our innovation is a multi-layered approach to providing multi-gigabit semiconductor solutions.

      The three layers of our Multi-layer Serial Link (MSL) architecture include the physical, coding and protocol layers. Serial link technology is the basis for the physical layer, which performs electrical signaling in several data communication protocols, including HDMI 1.1, DVI 1.0, Serial ATA and Fibre Channel. This technology converts parallel data into a serial stream that is transmitted sequentially at a constant rate and then reconstituted into its original form. Our high-speed serial link technology includes a number of proprietary elements designed to address the significant challenge of ensuring that data sent to a display or a storage device can be accurately recovered after it has been separated and transmitted in serial streams over multiple channels. In order to enable a display or a storage device to recognize data at the proper time and rate, our digital serial link technology uses a digital phase-locked loop combined with a unique phase detecting and tracking methods to monitor the timing of the data.

      At the coding layer, we have developed substantial intellectual property in data coding technology for high-speed serial communication. Our TMDS® coding technology simplifies the protocol for high-speed serial communication and allows tradeoffs to be made in physical implementation of the link, which in turn reduces the cost of bandwidth and simplifies the overall system design. In addition, we have ensured direct current balanced transmission and the ability to use TMDS® to keep electromagnetic emissions low and to enable connection to fiber optic interconnects without use of additional components.

      Our PanelLink HDMI technology sends high-fidelity digital audio and can protect video across the HDMI link for use in the consumer electronics market. Combining digital video and multi-channel digital audio transmissions in a single interconnect system simplifies and reduces the cost of the connection between consumer electronics devices, while maintaining high quality and content protection. PanelLink HDMI technology is fully compliant with the HDMI 1.1 specification.

      We have assembled a team of engineers and technologists with extensive experience in the areas of high-speed interconnect architecture, circuit design, digital video/audio processor architecture, storage architecture, logic design/verif